Economies of scale and diminishing returns essay

If a shirt producing firm was to start off with one worker who can produce ten t-shirts in a hour the this workers marginal benefit would be ten. This pattern will continue until a number is met that can not keep upwith fixed variables of production.

The law of diminishing return can only take place in the in the short run.

The fifth willbe added, 70 t-shirts will me made in an hour and the marginal benefit will become 10 as there isa 10 unit increase in the product from Economies of scale and diminishing returns essay there were five workers.

This can be changed byletting on of the six workers go as they will then be making more out and paying less employeesthis equals more money for the firm to spend as they feel needed.

Ricardo was an economist who was responsible for the development of the law ofdiminishing return. The third law or theory that Ricardo helped develop is the law of diminishing returns, thelaw of diminishing returns is a simple theory however it is imperative that it is observed by firmsas it can cause great financial loss.

The law of diminishing return hasa direct effect on the amount of money that a firm has, therefore as the law of diminishing returnplays it self out companies will be adjusting their workforce causing either an increase ordecrease in their expenditure leaving them more money to spend later on in some cases.

As the fixed factors of production will only be able to handlethree workers and work up to full potential. Has all factors of production increased together, this problem would have most likely been avoided.

It was not until age 37 when Ricardo first published his views oneconomics, after he reached the milestone of publishing his first article he continued to work anddeveloped his theories, it was ten years later, at the age 47 when most say Ricardo reached hispeak of fame. However, when the firm starts to produce units per week, 3 truckload trips are required to transport the shoes, and this additional truckload cost is higher than the economies Economies of scale and diminishing returns essay scale the firm has when producing units.

This is becausethe law of diminishing return is where you will only change one of the fixed variables ofproduction, in the case of the law of diminishing return the only factor of production that ischanged is the amount of people in the workforce therefore the law of diminishing returns takesplace only in the short run as only one factor is altered.

Despite their similarities, the two concepts are quite different to one another. For the steak holders and management of the firm the law of diminishing returns is aninvaluable resource that is used to maximize productivity of a firm. This helped this group ofeconomists develop the law of diminishing return because these economists were worries that asland was in diminishing supply this factor of production would run out and cause diminishingreturns.

Both these concepts represent how the company can end up making losses as inputs are increased in the production process.

What is the difference between Diminishing Returns and Diseconomies of Scale? If the owner of the firm decide hewanted to increase his workforce to two workers. Diseconomies of scale refers to a point at which the company no longer enjoys economies of scale, and at which the cost per unit rises as more units are produced.

This may seem strange as in common understanding it is expected that the output will increase when inputs are increased. In conclusion, the law of diminishing returns is a resource that is valuable to firmsby allowing them to ensure they are working at maximum efficiency.

But in todays world, this famous law seems to have been turned on its head. Another major difference between diminishing returns and diseconomies of scale is that diminishing returns to scale occur in the short run, whereas diseconomies of scale is a problem that a company can be faced with over a longer period of time.

This will keep the firm is businessfor time to come as well as allow it to grow substantially with out hurting its feature. The three accomplishments that Ricardo has received most credit for arethe labor theory of value, the law of diminishing return as well as the Barro Ricardo equivalence4.

Since these concepts are quite similar to one another, they are easily confused as the same. This downgrade willcontinue until to many workers are employed and the additional workers are have negativemarginal benefits.

In this case, the firm should stick to producing units, or find a way to reduce its transport costs. In this case we will say that the fixed factors of productionwill allow for up to three workers to be employed and be able to grow at a increasing rate.

In order for firms to continue to grow their product they must move to location to a lessfertile location which boasts poor soil, this will lead to the agriculture firm needing to put moremoney into growth steroids for the product or good they grow.

Another application for this law is in Athletics, for runners, their investment The following example offers a good understanding of how this may occur. I will now demonstrate the idea of the law of diminishing return in a example of a t-shirtproducing firm.

Ricardo did not reach immediate fame,in fact it quite the opposite. This is an example of what will happen once a sixth worker is added. The labor theories of value were furthered developed by Ricardo as wellas fellow classical economists including Adam Smith, the Labor theory of value is not commonlyused in current times and instead it has been replaced with the marginal utility approach.

This willalso allow the firm owners to become more wealthy and this will give the owners andmanagement the option of using this extra income to improve the firms factors of production.

The main differences between the law of diminishing returns and returns to scale are that one is a concept in What is Diminishing Returns? David Ricardo is responsible for the creation as well as the development of a number ofkey economic theories which allowed past and current economist to better understand todaysever changing economy.

Ricardo was bornon the 27th April and helped develop key economic theories until his death on the 11thSeptember 1. In 6 months, the plant is overstaffed and, therefore, instead of the required 3 workers, 10 workers are now allocated for one car.Explain How a Firm Can Experience Diminishing Returns in the Short Run and Economies of Scale in the Long Run - Download as Word Doc .doc /.docx), PDF File .pdf), Text File .txt) or read online.

Economics Essay.5/5(3). The main differences between the law of diminishing returns and returns to scale are that one is a concept in the short term, while the other can only occur in the long term.

A firm can use both to increase output, and both can lead to unwanted negative effects, if /5(3). Analyze, with the Aid of a Diagram, Whether There Is Link Between Diminishing Returns and Economies of Scale.

Words | 5 Pages. Analyze, with the aid of a diagram, whether there is link between diminishing returns and economies of scale. (12) Variable factor is an input whose quantity can be changed in the time period consideration.

Distinguish between diminishing returns and economies of scale To what extent do economies of scale affect the size of the firm In Business Economics, the short run is defined as a period where at least one factor of production (land, labour, capital) is fixed.3/5(2).

Diminishing returns From Wikipedia, the free encyclopedia Jump to: navigation, search In economics, diminishing returns (also called diminishing marginal returns) refers to how the marginal production of a factor of production starts to progressively decrease as the factor is increased, in contrast to the increase that would otherwise be normally expected.

Distinguish between diminishing returns and economies of scale (15 marks) In Business Economics, the short run is defined as the concept that within a certain period of time, in the future, at least one input is fixed while others are variable and the long run is defined as a period of time in which all factors of production and costs are variable.